Embed Doc
Copy Link
Readcast
Collections

CommentGo Back

Download

PP11072/4/2008

21 February 2008

CPI, January 2008

Slightly below expectations…



The Consumer Price Index (CPI, 2005=100) in January held near a 10-month high at 2.3% YoY (Dec: +2.4% YoY). Slower increases in foodprices (3.9% YoY vs Dec: 4.3% YoY) kept the inflation rate relativelystable despite the faster increases in the prices of “alcoholicbeverages and tobacco” (9.0% YoY vs Dec: 8.8% YoY) ), “restaurantsand hotels” (6.7% YoY vs Dec: +6.1% YoY), “miscellaneous goods &services” (2.9% YoY vs Dec: +1.9% YoY), “health” (1.8% YoY vs Dec:1.6% YoY), “education” (1.5% YoY vs Dec: +1.1% YoY) and “housing,water, electricity, gas and other fuels” (1.2% YoY vs Dec: 1.1% YoY).



We maintain our 2008 CPI forecast at 3.4% (2007: +2%) amidpersistent increases in commodity prices – especially the impact onfood prices, and our expectations of higher fuel and energy prices bymid-year as the Government trims the related subsidies. A keyassumption in our inflation rate forecast for this year is a hike in fuelprices by at least 20% by mid-2008.



Despite the expected acceleration in the inflation rate this year, webelieve Bank Negara Malaysia will leave the Overnight Policy Rate(OPR) steady at 3.5% to support domestic demand, and henceeconomic growth.

Table 1: Malaysia: Consumer Price Index (CPI, 2005=100) (%, YoY)

Jan-08 Dec-07 Nov-07 Oct-07 2007 2006

Total 2.3 2.4 2.3 1.9 2.0 3.6

Food and Non-AlcoholicBeverages3.9 4.3 3.9 3.1 3.0 3.4Alcoholic Beverages andTobacco9.0 8.8 8.9 8.9 7.8 6.9Clothing and Footwear (1.4) (0.7) (1.2) (0.7) (1.4) (1.3)Housing, Water, Electricity, Gasand Other Fuels1.2 1.1 1.2 1.2 1.3 1.5Furniture, HouseholdEquipment and RoutineHousehold Maintenance1.2 1.2 1.2 1.0 1.1 1.1Health 1.8 1.6 1.5 1.5 1.6 2.1Transport 1.1 1.3 1.2 1.1 2.3 11.0Communication (0.8) (0.8) (0.8) (0.9) (1.2) (1.4)Recreation Services andCulture2.5 2.5 2.4 2.2 1.4 0.7Education 1.5 1.1 1.4 1.5 1.8 1.6Restaurants & Hotels 6.7 6.1 5.6 4.7 3.7 3.7Miscellaneous Goods &Services2.9 1.9 2.1 1.6 0.9 2.2

Source: Department of Statistics

Suhaimi IliasSuhaimi_ilias@aseam.com.my603-2297 8682Saifuddin Moratsaifuddin@aseam.com.my603-2297 8684

ECONOMICECONOMICECONOMICECONOMICTRENDSTRENDSTRENDSTRENDS

CPI January 2008ECONOMIC TRENDS

▪

21 February 2008 Page 2 of 6Malaysia: Consumer Price Index (CPI)

012345

J a n - 0 2 M a y - 0 2 S e p - 0 2 J a n - 0 3 M a y - 0 3 S e p - 0 3 J a n - 0 4 M a y - 0 4 S e p - 0 4 J a n - 0 5 M a y - 0 5 S e p - 0 5 J a n - 0 6 M a y - 0 6 S e p - 0 6 J a n - 0 7 M a y - 0 7 S e p - 0 7 J a n - 0 8

(5)05101520FoodCPITransport(RHS)Utilities, Housing & Other Fuels

Source: Department of Statistics

The Consumer Price Index (CPI, 2005=100) was up 2.3% YoY in January,

little changed from the 10-month high of 2.4% YoY in December, and slightlybelow our and consensus expectations of 2.4% YoY. Overall, monthly inflationrate has been inching up from the recent low of 1.4% YoY in May-June 2007.

Slower increases in food prices of 3.9% YoY (Dec: +4.3% YoY) helpedkeep the inflation rate relatively stable last month, offsetting fasterincreases in other prices of good and services,

namely “alcoholicbeverages and tobacco” (9.0% YoY vs Dec: 8.8% YoY) ), “restaurants andhotels” (6.7% YoY vs Dec: +6.1% YoY), “miscellaneous goods & services”(2.9% YoY vs Dec: +1.9% YoY), “health” (1.8% YoY vs Dec: 1.6% YoY),“education” (1.5% YoY vs Dec: +1.1% YoY) and “housing, water, electricity,gas and other fuels” (1.2% YoY vs Dec: 1.1% YoY). Prices at “restaurants andhotels” accelerated last month for the ninth consecutive month, reflecting acombination of higher costs of food, beverages and fuel/energy (especiallycooking gas which has doubled over two years) as well as higher room rates,which were passed through to final consumers amid strong demand thanks tothe robust growth in domestic consumer spending plus the strong increase intourist arrivals as “Visit Malaysia Year” was extended to 31

August 2008.

This year, we expect the inflation rate to quicken to 3.4% from 2% lastyear, mainly due to the expectation that the Government is going toresume cutting fuel/energy subsidies

given the steady uptrend in crude oilprices since the last fuel price hike in February 2006. We expect theGovernment to resume cutting fuel subsidies by the middle of this year. Weestimate that fuel subsidies account for as much as 70% of the Government’stotal annual spending on subsidies, which is budgeted to drop to RM10.2b thisyear from the estimated RM12.2b last year (2006: RM10.1b).

We are assuming a 20% increase in fuel prices by mid-2008, which

will have

knock-on effect of prices of goods and services, especially on the costs of public and private transportation costs

(taxis, buses, lorries, ferries), ontop of the 7.7%-60% increases in toll rates for some highways that came intoeffect on 1 January 2008. Furthermore, there is also a strong likelihood of areview in Petronas’ gas price, currently fixed at RM6.40 per mmbtu since 1997,with impact on Tenaga’s power tariff and energy costs of many industries.

In addition, high commodity prices are keeping the pressure on foodprices,

as reflected by the string of major food price increases last year andrecent statements by fast food chain operators KFC and Pizza Hut that theywill raise prices this year in response to escalating raw material costs, includingcrude oil, corn and soyabean.

CPI January 2008ECONOMIC TRENDS

▪

21 February 2008 Page 3 of 6

Nevertheless, we expect the Overnight Policy Rate (OPR) to remain stableat 3.5%...

We expect Bank Negara Malaysia to keep the OPR unchangedthroughout 2008, to sustain domestic demand and thus overall economicgrowth, notwithstanding the expected faster domestic inflation rate this yearand expectations of further reductions in the US benchmark interest rate amidthe downside risk to growth in the world’s largest economy.

…as inflation will be dealt with via administrative, non-monetary policymeasures.

Apart from the earlier “offset” measures to help the people dealwith the higher costs of living (e.g. hikes in civil service salaries and cost ofliving allowances (COLA), Employees Provident Fund (EPF) Account 2monthly withdrawal scheme), more recent policy and strategy to deal with theexpected faster inflation rate this year are mainly administrative measuresnamely:

•

Creating national stockpiles of essential goods

•

Establishing a National Price Council

•

Setting up a 24-hour National Call Center to report on price and supplyabuses of retailers and wholesalers

•

Banning the exports of 10 essential items – sugar, wheat flour, cooking oil,chicken, cement and clinker (except with permits), mild steel bars, petrol, allgrades of spirit and gasoline for motors, diesel and LPG.Nonetheless, it is important to appreciate that these measures may help tocontain prices pressures on essential consumer goods, but not on the costs ofservices.

In addition, we expect Bank Negara Malaysia to allow the Ringgit tostrengthen further, to partially contain inflationary pressures comingfrom import costs.

Therefore, we expect the Ringgit to advance to RM3.10per USD by end-2008 after the 6.7% and 7.1% gains in 2007 and 2006. So farthis year, the Ringgit has gained by 2.7% versus the greenback to a 10-yearhigh of RM3.22 as of yesterday.